A brief post on what needs to be done in LatAm

Economics-wise, that is.

Following the election results in Argentina and Venezuela, and the calls in Brazil for the impeachment of Dilma Rousseff, there are dozens of articles on the more-or-less imminent demise of socialist/populist/communist policies (including what Hugo Chavez named “21st-Century Socialism”) in our hemisphere.

In other words, a butterfly flapped its wings in China and caused a political hurricane in South America. Between 2000 and 2014, China’s demand for raw materials of every kind was so great that their prices soared and the coffers of commodity-based economies did too. That gave South American governments the money they needed to redistribute to their poor, and they did. But a combination of bad luck and bad management has left them without much margin for error today—which they need now that commodity prices have come down as a result of China slowing down.

The BNDES credit was cheap for the politically connected companies that the government wanted to save, but it has cost the nation. Subsidized credit also went to households. Mr. Lorenzon told me that currently the average Brazilian family is carrying an annual debt-service burden equal to 46% of its income. Currently the government’s largest real-estate lending program has a default rate of almost 22%.

To salvage its loans to domestic companies Brazil has raised import duties and promoted consumption of made-in-Brazil products. This has damaged innovation and development. Large offshore oil reserves aren’t likely to be developed as long as investors are hamstrung by Brazilian content rules requiring their equipment to be made domestically.

Brazil is reaping the fruits of a national industrial policy that cannot produce growth and prosperity. The credit bubble has burst.

Until and unless each of the countries mentioned understand that, and their peoples and institutions commit to true economic reform, don’t believe socialist/populist/communist policies are dead.